Last April 5, the stock market was fed a harum-scarum dosage of sickening news:
Newly released first-quarter figures showed producer prices up sharply to more than 14 percent on an annual basis.
Labor negotiating problems (since resolved) between the truckers and government had turned sour.
Another round of rising energy prices (leading to even higher rates of inflation) seemed inevitable.
A hot rumor was also making the rounds that spring day: Carter insiders said, was on the verge of urging the Federal Reserve to tighten credit-an action that, if taken, could speed up a recession and push near-record interest rates even higher. Clearly a frightening thought.
So what did the market do on April 5? Not the swan dive you might think. It rose nearly eight points (as measured by the Dow Jones Industrials) to its highest level in almost six months. The unmistakable message (repeated time and time again throughout '79): This stock market simply doesn't want to go down. And when it does, it gives ground grudgingly. The bad news, it seems, at least for now, has been anticipated and discounted. Those big guns-the institutional heavies-are willing to look beyond it.
In effect, those fellas who run the institutional billions are making a bet-namely that the next several months will witness a slowing economy (notably in the consumer and housing sectors) and a peaking of inventory accumulation at the manufacturer level. And this, in turn, so the scenario goes, should trigger a reduction in interest rates. Apparently, a growing number of foreign institutions are also buying this script. And this rosy expectation-plus the dollar's continued buoyancy-is prompting them to become more aggressive in U.S. equity purchases.
Market bulls also are serving up a number of other reasons for their enthusiasm. They point to gobs of institutional cash now on the sidelines (an estimated $55- $75 billion in pension funds alone), lots of undervalued stocks (it's noted, for example, that the DJI is selling at only about eight times estimated '79 earnings and sharply rising corporate purchases of their own shares. In addition, the buy-out craze-the merger and acquisition trend-is continuing strong. (Latest example: Brascan's bid for Woolworth.) And dividend payouts to shareholders have never been greater. Still another reason for optimism: the pessimism of a Business Week reporter who told a money manager I know that the market's in for a big decline because of worsening inflation. For my money, Business Week is one of the best market indicators-provided, of course, you go the opposite route. So that BW comment alone should make anyone bullish.
If you buy Wall Street's bullish argument-and we'll get to the bearish case later on-how do you play the market? For some thoughts on that very subject, I asked three smart moneymen-each with a markedly different strategy-to select their 15 favorite stocks for the next 6 to 12 months. (Their selections appear on C4). Each, by the way, is presently positive on equities and has outperformed the market in recent years. Here's a brief run-down on the three men and their thinking:
John Neff, the well-respected portfolio chief for three Wellington Management funds, with his biggle being the $675 million Windsor Fund, is strictly a value-oriented player who focuses on low price-earnings multiples. "I take stuff on when it's out of favor . . . and who the hell knows when it's going to come back," he says. But Neff, unlike a lot of other nervous investors, is willing to wait. He believes his fifteen favorites, even in a do-nothing market, have the potential to rise 10 percent to 15 percent by the end of '79. His thesis: "Above-average growth [11.1 percent in earnings], good yields [average is 5.5 percent] and giveaway prices [average p/e of 4.8]."
The big names, including a sizable number of quality growth stocks, conspicuously dot Waid Vanderpoel's list. He's the investment of the First National Bank of Chicago, the nation's ninth largest bank, and he supervises over $6 billion of pension and personal assets. Why quality growth stocks? Vanderpoel says the group, except for IBM, is selling at lower p/e's and in some cases substantially lower p/e's, than they were during the '74 market bottom (when the DJI was around 570). "It could be one of the strongest groups this year [a view shared by a number of to-flight analysts], and I think you've got to get in early, even if you're a bit too early," he says.
Interestingly, energy stocks-one of the market's recent rages-are noticeably absent from both Neff's and Vanderpoel's lists. Because of their recent run-ups, Vanderpoel has been a seller of such stocks as Atlantic Richfield, Mobil Oil, Standard Oil of California and Standard Oil of Indiana. Neff has also chopped his energy holdings (notably the domestic oils) more than 50 percent, in fact, and he's still selling. His reasoning: 'They're up a good deal; yet everybody's still falling over themselves buying these stocks . . . which is dangerous. Atlantic Richfield was great at forty-six, but it's now sixty-five."
An old friend, John Westergaard, who could easily pass for a college professor, is my third stock picker. Westergard, executive vice president of Anametrich Inc., a financial services company which includes the management of $110 million of investment assets, has been running a hot hand the past two and a half years, due largely to the market's greatly renewed interest in emerging growth companies below Fortune 1,000 status with above-average return on shareholder equity (over 20 percent) and high visible-earnings growth (15 percent or better). Westergaard's 15 choices, it should be duly noted, ar already up an average 134 percent since he recommended them-striking me that he's not serving up any bargains. But he strongly disagrees, observing that the group is still selling only at an average 10.1 times his estimated '79 earnings. And in bull-market peaks, they traditionally sell at twice the p/e of the major market averages.
I, for one, am not about to question the choices of the three men, but it's worth noting that even the savvy get slaughtered. In that market break last October, for example, in which the DJI plummeted from the high 800s to the low 800s, it took just a couple of weeks to wipe out half the gains that Westergaard had accumulated since.
Now, I've personally been bullish on the market since last November, when our president finally got off his fanny and decided to defend the greenback, but I'm beginning to get a bit squeamish: I'm not at all convinced that there will be any immediate break either in inflation or in the high level of interest rates. Without some letup soon, I'm not sure just how long this schizophrenic market's major players, the big institutional investors-despite their bundles of ready cash-will continue to maintain their cool.